Federal Trade Commission Proposes Ban on Noncompete Agreements

Federal Trade Commission Proposes Ban on Noncompete Agreements

January 20, 2023

The Federal Trade Commission (FTC) proposed a rules change to outlaw the use of non-compete agreements between employers and employees. The proposed rule defines a “non-compete clause” as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”

The proposed rule includes a potential ban on the use of other restrictive covenants – such as non-solicitation clauses and some confidentiality agreements - where such restrictions effectively function as non-competes. Under the new rule, if a non-disclosure or non-solicitation clause “has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer,” such restriction would likely be deemed overbroad and, therefore, unenforceable.

The FTC’s proposed ban on non-competes extends to existing restrictive covenants, as well. Section 910.2(b) states:

(b) Existing non-compete clauses.

(1) Rescission requirement. To comply with paragraph (a) of this section, which states that it is an unfair method of competition for an employer to maintain with a worker a non-compete clause, an employer that entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than the compliance date.

To rescind in compliance with the proposed rule, businesses/employers must provide formal written notice of rescission to both existing employees bound by a non-compete clause and former employees (except those whose contact information is not “readily available”) bound by non-compete clauses.  The proposed rule provides a template notice of rescission language that can be used to comply with this requirement:

A new rule enforced by the Federal Trade Commission makes it unlawful for us to maintain a non-compete clause in your employment contract. As of [DATE 180 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE], the non-compete clause in your contract is no longer in effect. This means that once you stop working for [EMPLOYER NAME]:

You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].

You may run your own business—even if it competes with [EMPLOYER NAME].

You may compete with [EMPLOYER NAME] at any time following your employment with [EMPLOYER NAME].

Importantly, the proposed rule will not affect non-compete clauses between the seller of a business and the buyer of that business where the seller is an owner, member, or partner holding at least 25% ownership in the sold business.

The FTC will accept public comment/feedback on the proposed changed through March 10, 2023. At that time, the Commission may make changes to the rule, based on the feedback gathers, before scheduling a final vote. If passed by the board, the new rules will take effect 180 days after such a vote occurs.

This proposed rule, if enacted later this year, will have a significant impact on the relative rights and duties of employers and employees in all 50 states.  If you have questions about the use of non-compete agreements within your company, or any similar employment law questions, please contact any member of our labor and employment law practice group.

Attorney Kevin Burke counsels employers on recent developments in employment law, and the implementation of policies and procedures which enable employers to be in compliance with federal and state laws. He can be reached at 716-854-4300 ext. 292 or kburke@gross-shuman.com